Sidelined: Fox took office promising reform for a country badly in need of a change. Then, nothing happened.

To best see the economic effects of Mexico's current political paralysis, stop in at the office of Jose Garcia Briones, director of energy services at KoSa, a multinational manufacturer of polyester fiber. In the Santa Fe neighborhood of Mexico City, Garcia Briones is at the front lines in Mexico's battle for change since Vicente Fox became president.

Garcia Briones says he has personally witnessed the harm done to Mexican business by the lack of reform in one important area--the state-owned energy sector. KoSa has plants in Canada, the United States and Germany, and two in Mexico. The company once had three plants here but in the spring of 2002 it closed a factory in Toluca, laying off 600, partly because of the high cost of electricity. "The price we pay is 300% higher" than in the United States or Germany, he says and can account for up to 16% of the final product cost. "Very often we can't even bid on jobs. At times, it takes us out of the market."

Garcia Briones is not alone. Mexico's Confederation of Industrial Chambers estimates that 4,000 of its member businesses closed in 2003 due to the high electricity costs. "Many of us in the company and the industry expected that there'd be reforms in natural gas and electricity by now that would open a market for energy similar to what's available in the United States, where companies can choose which energy company to use," says Garcia Briones.

So much change was expected of Mexico by now.

Fox's campaign made changing the country the centerpiece of its message. The former Coca-Cola executive played on ordinary Mexicans' weariness after 71 years of of ten-corrupt, inefficient rule under the Institutional Revolutionary Party (PRI). In July 2000, voters made history, dumping the PRI and electing Fox and his National Action Party.

Yet Mexico's expected transformation has been postponed. Its laws and institutions still seem to fit the habits and priorities of a crusty, backward one-party state. The state energy monopoly, for example, has failed to invest in electric plants and natural-gas wells and has done a shoddy job maintaining its electricity distributors, on top of high prices. But that's just one symptom of an overwhelming national ailment. Energy isn't even Mexico's most pressing or complicated reform.

Widespread tax evasion has left the central government without the revenue to invest in healthcare, transportation or environmental cleanup. The country's massive labor law--as thick as a big-city phone book--benefits union leaders to the detriment of workers and business owners alike, stifles job creation, and pushes people into the informal sector.

Mexico's public education system, meanwhile, needs total overhaul, says Clemente Ruiz, an economist specializing in regional development at the National Autonomous University. "We've bet on a low-cost model to compete internationally," Ruiz says. "This doesn't work today because there's always someone who'll do work cheaper. Our education system teaches people how to be low-wage employees. The number of patents Mexico registers annually, 500 or so, is the same number the United States registered in 1820. We need to develop abilities."

City government is one of the most urgent, and least discussed, reforms. To concentrate PRI power in the capital tax revenues were diverted to the federal government, starving cities. Most have no civil service and only minimal taxing authority. They can't pave streets, equip police or plan for their economic future. Some can't even afford to collect garbage.

The problem is acute in fast-growing border cities. In 2002, when Conrado Cantu became public works director for the city of Reynosa, half the streets were unpaved and 40% of the neighborhoods were without storm drains. He had a US$17 million budget with which he had to attack a mountainous backlog in electrification, school construction, sewers and drinking water projects, as well as to build streets and storm drains in the city of 1 million. "We've got a lot of workers coming here from other states. They're welcome," says Cantu. "But with the growth we're experiencing, the budget isn't enough."

Chronic municipal anemia creates huge extra costs for Mexican companies. Jorge Wong almost lost his metal shop because of it, Wong is one of a growing number of Mexican entrepreneurs who have opened metal shops in Reynosa to make machine parts for maquiladora assembly plants. When he started in 1991, like many shop owners, Wong located in an outlying neighborhood of unpaved streets to cut costs.

Unpaved. Eleven years later, torrential rains came. The city still hadn't paved streets in Wong's neighborhood. Nor had it built storm drains or cleared a wide drainage canal nearby. Water backed up and flooded Wong's business, which by now was employing 20 people.

Several machines were destroyed, at a cost of $150,000. Wong dosed for two weeks. He's since had to pay to raise the floors and doorways. Wong complains that he had to pay a topographer out of his own pocket to level city streets.

No one expected changing all this would be quick or easy. But out from under the yoke of PRI rule and an all-powerful president at the head of central government, many people felt Mexico could begin the arduous process of becoming a more fair country. It could prepare itself to compete in the global economy with more than just cheap labor. Its government could now begin to evolve into something open, modern and agile.

Instead, a deadening paralysis took over. In 2001, Congress passed a "fiscal reform" taxing caviar and yachts and changed parts of the tax code. But that's all.

Prospects for the final two years of Fox's term look no better. In mid-2005 an election year begins, so little substantive legislation is expected. Meanwhile, Fox appears to have neither support in Congress--which has sat firmly on its hands since 2001--nor the ability to rally the country to support his ideas. The next president, whatever his or her party affiliation, likely will take charge of a country with exactly the same urgent needs Fox found upon taking office three years ago.

In the past, Mexico might have gotten away with this kind of legislative gridlock. But in the global economy, things move faster. Companies must compete with competitors the world over, many of whose governments don't appear to have such difficulty agreeing on policy direction. India, for example, reformed its state-owned energy sector last summer and in January announced construction of the world's largest gas-fired power plant. Mexico's masquiladoras, especially those with the most mechanized and repetitive work, have begun to leave for China, which is quickly becoming the world's factory floor.

Low-cost transportation, broadband Internet and highly mobile factors of production that made geographic proximity to the United States a competitive advantage now matter less. Those opting to stay--like Wong in Reynosa--are frantic to cut costs. "It no longer matters whose work is better or who's doing it. They buy from whoever is cheapest," Wong says. "It's all due to the so-called 'dragon effect' China. Since Chinas wages are cheaper, they're trying to see what they can make here and they're trying to find savings anywhere they can."

The first person blamed is usually Vicente Fox. He ran a campaign of masterful political marketing. But his victory at the polls has created huge, and probably unmeetable, expectations among Mexicans. Since then, though, Fox hasn't learned politics in the new era. On several occasions, most notably in two attempts at tax reform, he hasn't even tried to sell his ideas to the public, apparently feeling it was enough to simply propose them and wait.

In the campaign, Fox was tough, sure and blunt. As president, he's seemed soft and indecisive, unappealing qualities in a country used to strong presidents. "Fox may have thought that it was enough to have beaten the PRI," says Jorge Chabat, a political scientist at CIDE, a private Mexico City university. "There was clearly a change between candidate Fox and President Fox. President Fox has been much more cautious, afraid of drastic changes, when the image he presented during the campaign was of someone who wanted drastic change."

Checked power. Blaming the president, however, is a vice in which Mexicans luxuriated during PRI rule, when the president was practically king. Today, other institutions check executive power. Foremost among them is a newly independent Congress--divided among five parties, none with a majority. After decades as a presidential lapdog, the Congress has asserted itself. It has blocked many of Fox's measures while offering no reasonable alternatives.

Fox's energy reform proposal, for example, has languished in Congressional committees since 2001. "It's a good beginning for a discussion. What we'd hope is that the Congress would discuss it, improve it, and Congress has done nothing," says Eduardo Andrade, president of the Mexican Association of Electric Energy.

In fact, though reborn, Mexico's Congress--like its energy sector, labor law and tax code--remains a throwback to another era. A growing number of observers believe political paralysis will be overcome only when Congress itself is reformed and, above all, when re-elections are allowed. Most legislators now learn little about the complex subjects they must vote on, such as telecommunications, healthcare, tax policy, before their terms expire. Legislators can stand for re-election but first, must wait out a term.

Since they can't be immediately re-elected, legislators are beholden to party leaders for their next job. Thus they tend to vote as leaders order The priority of each party's leaders, in turn, is to win the presidency, and this requires the opposition to make the sitting president look ineffective. Paralysis ensues.

Meanwhile, faceless hundreds of legislators aren't often held accountable by the media or by a public that rarely knows the names of its Congressional representatives, much less call or write to them. The result is an unaccountable Congress actively interested in not negotiating with the executive branch. Many reforms will require changing the Mexican Constitution, which, in turn, requires a two-thirds majority of Congress, an impossible consensus to achieve in this or any foreseeable Congress. Congress instead would have to reform itself, which it shows no interest in doing. The current stagnation seems poised to easily outlive the Fox administration.

Another institution still floundering in these new Mexican times is the media. Fox's predecessor, Ernesto Zedillo, responding to pressure within Mexico for change and increasing freedom of expression worldwide, allowed the media more liberty. Under Fox, they've become more rambunctious than ever. Despite their new freedoms, the media tends to focus on daily news, not in-depth issues reporting voters need to act.

Sales job. On the other hand, the reforms Mexico needs are complicated and difficult to understand. They beg For a concerted government campaign explaining to Mexicans why they're needed and the eventual costs of inaction. Neither Fox nor the business sector has mounted such a campaign. On the contrary, Fox pushed ahead with a proposal to tax food and medicine in December, when the idea had failed two years before, having done nothing in the interim to convince Congress or the country to support it.

Unions of electrical workers have staged massive demonstrations in Mexico City against private investment in energy, arguing that it would sell out the Mexican people, Lo whom the energy supposedly belongs. Yet no business organizations have shown the public-relations savvy to counter that argument LATIN TRADE made more than a dozen interview requests lo the national business organizations supposedly lobbying of Congress and the country for energy reform. Almost none were honored.

Mexico took a generation to transition from one-party rule to democracy. Very few believe the country has that luxury of time any more. "China is advancing rapidly," says political scientist Chabat. "Meanwhile, the country wastes time discussing whether we should allow 10 or 15 FBI agents at the airport.

"The ones who are going to pay are the ones who've always paid: the poor. They'll remain poor and exclude&," says Chabat. "The longer we wait to do these reforms, the longer they'll wait to improve their conditions of life."

The Messenger

Jorge Castaneda served as Foreign Minister under Mexican President Vicente Fox until his resignation in January 2003. He is best known for brokering an immigration deal with U.S. President George W. Bush--a deal which Sept. 11 put on hold until only recently. Castaneda talks with LATIN TRADE Editor-in-Chief Greg Brown about fixing his former boss's message before Mexicans choose a new leader in July 2006.

Fox has changed politics. Has politics changed Fox?

Well, yes, it has changed him. I think he has become more aware of the difficulties of bringing change to Mexico. More aware of the resistance to change in Mexico, the limits of what can be done. But I think he's also learned that if he pushes hard for the things he really wants he can educate people just by trying.

A lot of reforms are stuck in the Congress. Can Mexico compete without these reforms or are they as crucial as people say?

Most of them are crucial, but not all of them are. There are many ways in which can be more competitive without all of the reforms. I'm not convinced that electrical power reform is that overwhelmingly important.

What's the most important reform?

Of the structural reforms, tax reform is. Energy in general but not specifically power. Though I think institutional reforms are more important.

Congress has stalemated the president. Can that be undone?

No, not without institutional reforms, reelection, referendum, prime minister type of situation, no.

So we're waiting for the next president?

Or for President Fox to change emphasis and to try and get the institutional reforms done.

What should Fox's message he to the people?

I think his message should be: "Mexico cannot be governed democratically and effectively without institutional reforms, let's get them done so we can leave the next guy or next woman the proper institutional framework so that he or she can get done what has to be done. I can't do that but I can give him the tools to do it."

Who's the next president of Mexico?

I don't know. We'll find out. [Laughs]

Steady as She Goes

Trade is up and investment will recover, but growth remains weak for Mexico.

[GRAPHICS OMITTED]